20 Frequently Used Financial Abbreviations

Are You Confused By The Sea Of Letters? Here's A Handy Guide To Help You Out.

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Whether you're just jumping into the world of finance or you're already an avid follower of the markets, understanding the sea of letters and abbreviations can be a challenge.  Here's a great guide to twenty frequently used abbreviations that you'll come across often. 

1. DJIA:  Dow Jones Industrial Average.  The DJIA is a stock market index created by Wall street Journal editor Charles Dow.  The average, founded on May 26, 1896, is named after Dow and statistician Edward Jones.

 The DJIA shows how 30 large publicly owned U.S. companies have traded during a standard trading session in the stock market.

2. NASDAQ: National Association of Securities Dealers Automated Quotations System.  NASDAQ is a term that has two meanings.  It is the first electronic exchange, where investors can buy and sell stock.  NASDAQ also refers to the Nasdaq Composite Index, which, like the DJIA, is a statistical measure of a portion of the market.

3. IPO: Initial Public Offering.  An IPO is the first sale of stock by a company to the public in order to raise money by issuing equity. 

4. EPS: Earnings Per Share.  EPS is the portion of a company’s profit allocated to each outstanding share of common stock.  EPS is an indicator of a company's profitability and can be calculated as: Net Income- Dividends on Preferred Stock/Average Outstanding Shares.

5. EBIT: Earnings Before Interest and Taxes.

 EBIT is all profits before taking into account interest payments and income taxes.  By excluding both interest expenses and taxes, EBIT hones in on the company's ability to profit, making to easier for cross-company comparisons.

6. EBIDTA: Earnings Before Interest, Taxes, Depreciation, and Amortization.  EBITDA stands for earnings before interest, taxes, depreciation and amortization.

 It is an accounting convention designed to arrive at an earnings figure that presents results on an operating basis. EBITDA encompasses revenue minus wages, utilities and other expenses needed for day-to-day operations.

7. ECN: Electronic Communications System.  An ECN is a type of computerized forum or network that facilitates the trading of financial products outside of traditional stock exchanges.  These electronic systems widely disseminate orders entered by market makers to third parties and permit the orders to be executed against in whole or in part.  The primary products that are traded on ECNs are stocks and currencies.

8. HFT: High Frequency Trading.  HFT is the use of sophisticated technological tools and computer algorithms to rapidly trade securities.

9. VIX: Volatility Index.  The VIX is known as a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.  When sentiment reaches one extreme or the other, the market typically reverses course.  The VIX is based on data collected by the Chicago Board Options Exchange (CBOE).

10. ETF: Exchange Traded Fund.  An ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.

 ETFs experience price changes throughout the day as they are bought and sold.  An ETF generally holds 30-300 securities in its basket.

11. ROI: Return On Investment.  ROI is the most common profitability ratio. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets.  For example, if your net profit is $100,000 and your total assets are $400,000, your ROI would be .25 or 25 percent.

12. AHT: After-Hours Trading.  AHT refers to the buying and selling of securities on major exchanges outside of specified regular trading hours.  For example, while both the New York Stock Exchange and Nasdaq National Market operate from 9:30 a.m. to 4:00 p.m. EST, AHT extends beyond these traditional hours. 

13. HELOC: Home Equity Line Of Credit.  A HELOC is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house (akin to a second mortgage).

14. CDO: Collateralized Debt Obligation.  A CDO is a type of structured asset-backed security (ABS). Originally developed for the corporate debt markets, over time CDOs evolved to encompass the mortgage and mortgage-backed security ("MBS") markets.

15. LBO: Leverage Buy-Out.  A LBO is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.  Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

16. NI: Net Income.  NI refers to a company’s total earning or profit, or a company’s bottom line.  It is a measure of how profitable a company is over a period of time.  It is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses

17. FCF: Free Cash Flow.  FCF is the amount of cash that a company is able to generate after laying out the money required to maintain or expand its asset base.  It can be calculated as operating cash flow minus capital expenditures.

18. GAAP: Generally Accepted Accounting Principles.  GAAP is the common set of accounting principles, standards and procedures that companies use to compile their financial statements.  It is the accepted way of recording and reporting accounting information.

19. USD: United States Dollar.  USD refers to the official currency of the United States and its overseas territories. 

20. LEAPS:  Long-Term Equity Anticipation Securities.  LEAPS are publicly traded options contracts with expiration dates that are longer than one year.  Structurally, LEAPS are no different than short-term options, but the later expiration dates offer the opportunity for long-term investors to gain exposure to prolonged price changes without needing to use a combination of shorter-term option contracts.  

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Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

Wes Moss is the Chief Investment Strategist at the financial planning firms Capital Investment Advisors and Wela. He is also the host of the Money Matters radio show on WSB Radio.  In 2014, Moss was named one of America’s top 1,200 financial advisors by Barron’s Magazine. He is the author of several books including his most recent, You Can Retire Sooner Than You Think  - The 5 Money Secrets of the Happiest Retirees, which has been one of Amazon’s best-selling retirement books in 2014.